Is This a Threat to Qualcomm Stock (QCOM)?
Dear reader, over the last two weeks, I’ve been warning you that QUALCOMM, Inc. (NASDAQ:QCOM) may suffer damage from antitrust litigation. At first, these lawsuits weren’t having much effect on Qualcomm stock (QCOM stock), but I warned you they were serious.
Cut to this week, and you’ll see Qualcomm’s share price has fallen 11.3% (at the time of writing). Has the worst passed? Is this an opportunity to buy a great stock at bargain bin prices, or is this the start of a long-term slump?
Let’s dig a little deeper…
The straw that broke the camel’s back was a lawsuit from Apple Inc. (NASDAQ:AAPL). Like most other smartphone manufacturers, Apple buys wireless modem chips from Qualcomm.
But in order to use those chips, it has to pay Qualcomm a license fee. Regulators have started cracking down on these royalty fees, saying that they are an illegal use of monopoly power, which is why Apple made its move.
First, Chinese authorities fined Qualcomm $975.0 million for abusing its control over prices, then South Korea followed it up with $854.0 million for the same charges. Not long afterwards, U.S. officials opened an investigation into the matter. The situation was looking pretty dire. (Source: “U.S. Antitrust Agency Sues Qualcomm Over Patent Licensing,” Fortune, January 17, 2017.)
Yet the market wasn’t reacting the way you would expect. Qualcomm stock hadn’t budged in response to these events, but I warned that downward pressure was mounting against the microchip maker.
It didn’t matter how you felt about the lawsuits. What mattered was that Qualcomm stock was vulnerable. Its cash flow was tied up in a huge acquisition, it couldn’t sustain much more damage, and sharks were beginning to circle.
Apple is one of those sharks. It filed a lawsuit claiming that Qualcomm owes it $1.0 billion in rebates. I have no idea whether that is true or not, but I know that Qualcomm can’t fight a war on multiple fronts, thus making it more likely to settle.
“For many years Qualcomm has unfairly insisted on charging royalties for technologies they have nothing to do with,” Apple said in a statement. (Source: “Apple is suing one of its most important suppliers,” Business Insider, January 20, 2017.)
“Despite being just one of over a dozen companies who contributed to basic cellular standards, Qualcomm insists on charging Apple at least five times more in payments than all the other cellular patent licensors we have agreements with combined.”
This kind of thing happens when companies are at their weakest. Qualcomm spent years as the 800-pound gorilla of the microchip industry. It gave Qualcomm a lot of pricing power, but now that it is plagued by litigation, of course its customers will look to renegotiate.
This is business, not personal. Having exposed a weakness means that Qualcomm is bleeding in the water. Sharks will do what is in their nature; they will circle Qualcomm stock and tear it to pieces. So am I worried about this friction between Apple and Qualcomm? In a word: Yes.